What is comparative advantage?
Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it was written) is unnecessary in free trade. Popularized by David Ricardo, comparative advantage argues that free trade works even if one partner in a deal holds absolute advantage in all areas of production – that is, one partner makes products cheaper, better and faster than its trading partner. The primary fear for nations entering free trade is that they will be out-produced by a country with an absolute advantage in several areas, which would lead to imports, but no exports. Comparative advantage stipulates that countries should specialize in a certain class of products for export, but import the rest – even if the country holds an absolute advantage in all products. (To learn more, read What Is International Trade?) The essence of this law can be illustrated with a simple example. Imagine that you are a skilled cabinetmaker as well as a gifted painter. It takes y
In economics, David Ricardo is credited for the principle of comparative advantage to explain how it can be beneficial for two parties (countries, regions, individuals and so on) to trade if one has a lower relative cost of producing some good. What matters is not the absolute cost of production but the opportunity cost, which measures how much production of one good is reduced to produce one more unit of the other good. Comparative advantage is a key economic concept in the study of free trade. Under the principle of absolute advantage, developed by Adam Smith, one country can produce more output per unit of productive input than another. With comparative advantage, even if one country has an absolute advantage in every type of output, the disadvantaged country can benefit from specializing in and exporting the product(s) with the largest opportunity cost for the other country.
Comparative Advantage according to David Ricardo happens when a country focuses on producing goods with which they capable of at the lowest rate and with most convenience. and the most relevant story I can think of, is the story of the MONKEY AND THE EAGLE (authored by, the monkey himself). The Monkey lives in “banana republic”, which is soaked with banana trees, banana leaves, banana trunk and banana heart. . The eagle lives in “Land of the Free Eagles” and they abound in metal, and other raw materials needed to produce hi tech pans, ovens, blenders and stoves which were needed by the monkey to cook his banana recipes and goods such as banana chips, banana cake, banana shake and banana balls. For a couple of years, the monkey and the eagle were good friends,EAGLE gives MONKEY the tools and MONKEY gives EAGLE bananas in return and so they were both able to eat banana recipes over the next 30 years. The bananas grew freely in Banana Republic and all that the monkey had to do is wait for
